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Commentary: Let Them Eat… Nothing

The disagreement over the nation's borrowing limit took a back seat to gun control and perhaps lost some urgency when House Republicans floated the idea of a temporary extension, which would do what Washington seems to be famous for--kicking the can down the road. But the controversy and its impact on the nation's financial credibility demands a solution that will last for more than just a few months.

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Now that House Republicans have agreed to a tactical vote on the so-called debt ceiling in the comingweek, it will again be center stage (translation: the lead story or close on the evening news).

President Obama has vowed to not negotiate over the debt ceiling, even in the face of rabid government illiterates (are they ""Capitol Hilliterates?"") who would be content to let the government shut down rather than agree to increase the nation's borrowing limit if the President doesn't give in to their demands for spending cuts.

They just don't get it and perhaps shutting the government will drive the point home for those who don't remember the chaos when then Speaker Newt Gingrich let the government close down 20 years ago.

The naysayers continue to insist the nation has a ""spending"" problem, which they are intent on solving, ignoring that we have not a spending (or even a revenue) problem but a jobs problem. Their approach is akin to getting your car washed because your kitchen is dirty.

The fight over the debt ceiling is really a debate over the role of government. While the GOP may feel confident about a debate after President Obama's first performance during the campaign, this is a debate the Republicans are gifting to the President if they let the government shut down. If Republicans ""succeed""--if that's the right word--in shuttering the government to make their point, they will make quite a different point: a dramatic reminder of all that government does and why we need it. The last time I checked, we don't inspect our own foods or safety test our own drugs; we don't maintain our own highways or do the thousands of other little things government does--or governments do--every day to make life livable.

This is, as Obama has suggested in other circumstances, a ""teachable moment"" and perhaps time for the President to re-establish himself as the educator-in-chief by holding firm on the debt ceiling which is, simply a mechanism to allow the government to pay the bills it has already incurred.

For Obama to agree to this round of spending cuts or indeed any spending cuts now would undermine the slow but steady improvement in jobs and the economy. To be sure, government doesn't have to be the employer of last resort, but virtually every dollar government spends means a job for someone. Maintaining debt stability allows that spending and job creation continue.

That the United States has the most stable debt in the world was demonstrated again this week when the Treasury reported foreign residents and governments accumulated a net $61.5 billion in long-term U.S. securities in November, the most since August. According to the report, net purchases of U.S. Treasury notes and bonds totaled $26.4 billion, more than double the $12.0 billion purchased in October.

Through November, private foreign investors accumulated a net $267.3 billion in long-term US securities in 2012, thanks in part to the Eurozone debt crisis and the relative strength of the US economy, and strength of the US dollar.

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Just a week after unveiling new rules for mortgage originations, the ""Consumer Financial Protection Bureau"":http://www.consumerfinance.gov/ stepped up its game by turning to the other end the mortgage business, ""collecting on loans"":https://themreport.com/articles/cfpb-releases-mortgage-servicing-guidelines-2013-01-17. When lenders make loans they look to how the loans will be repaid. CFPB has perhaps not taken a deep enough look at that aspect of the business.

To be sure, the ""new origination standards"":https://themreport.com/articles/cfpb-releases-qualified-mortgage-criteria-establishes-legal-protections-2013-01-10 attempt to ensure loans are made only to borrowers who can afford them without having to resort to a diet of corn flakes or pasta. That's a positive objective, but ignores a simple truth that ""life happens"" and sometimes alternative means of repayment become necessary.

One of the significant oversights in the origination rules was the absence of down payment standards which serve to protect lenders. (By the way, protecting lenders also works to be benefit borrowers by reducing the overall cost of credit if lenders can reduce their concerns, i.e. interest rates, because they can be more confident of repayment). More than 30 years ago a chief credit officer at Fannie Mae looked at his company's defaults from a variety of angles and found one persistent truth: borrowers who had put down at least $35,000 (this _was_ a long time ago), regardless of the value of the property or size of the loan, were less likely to default than those who hadn't.

CFPB may have compounded the oversight with some of its new default servicing requirements. Some make complete sense, especially those that bring the borrower into the process sooner.

One of the axioms though of default servicing is that ""first loss is best loss."" Lenders/default servicers don't want the process to drag on. Setting a 120-day floor before the lender can take steps toward foreclosure does give the borrower more time to cure the delinquency, but it also unnecessarily ties the lender's hands. Bringing the borrower lender together after 90 days would start the process sooner--when the delinquent amount is, by definition, 25 percent lower, perhaps more manageable.

That the new rules don't kick in for a year--much like the origination rules--will give both lenders and groups that represent borrowers an opportunity to think through the consequences. CFPB should build into any of its new rules a mandatory look back, six, nine or 12 months after a new rule takes effect, to determine if the rule(s) accomplished their objectives and where the speed bumps were.

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Economic data as they related to housing are usually concentrated in the last couple of weeks of the month. Next week's report lineup includes data on existing home sales (Tuesday) and new home sales (Friday) surrounding the ""Federal Housing Finance Agency"":http://www.fhfa.gov/ report Wednesday on home values for November.

Existing-home sales hit a ""three-year high in November"":http://www.dsnews.com/articles/existing-home-sales-jump-to-3-year-high-2012-12-20 (the most recent report) improving for the fourth time in five months. Coming into December 2011, existing-home sales had increased in three of the previous four months, but slipped at the end of the year. Economists don't expect a similar reversal this year, and a stronger labor market would support that view.

New home sales have also improved for four of the last five months, but that's where the comparison ends. The government's ""new home sales report"":http://www.dsnews.com/articles/nov-new-home-sales-at-31-month-high-2012-12-27 tracks contracts while the ""National Association of Realtors'"":http://www.realtor.org/ sales report is built on closings. As such, the new home sales report is a timelier economic indicator. Market consensus is new home sales will show another increase for December.

_Hear Mark Lieberman on P.O.T.U.S.--Sirius 124--every Friday at 6:40 a.m. and 9:40 a.m. Eastern time._

About Author: Mark Lieberman

Mark Lieberman is the former Senior Economist at Fox Business Network. He is now Managing Director and Senior Economist at Economics Analytics Research. He can be heard each Friday on The Morning Briefing on POTUS on Sirius-XM Radio 124.
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